November 21, 2017

Fully paid and non-assessable

Why 'Fully paid and non-assessable?"

Many railroad stock certificates carry the declaration "Fully paid and non-assessable." In simple terms, that means that companies agreed to NOT demand money from shareholders beyond the amount they paid for their shares. While stock exchanges did not require such statements on certificates, many companies added the phrase to purposely distinguish their issuances from companies that could – or would – demand extra money from shareholders.

It was very common to see the phrase "Fully paid and non-assessable" on paper stock certificates before electronic trading came along in the 1990s. While not necessarily understood by investors at the time, its presence on collectible certificates now serves as clear evidence that most early stocks were assessable.

Assessability grew out of high par values

Prior to 1910, approximately 90% of all railroad companies sold shares for $50 or $100 per share (the par value). That percentage did not vary much throughout that entire period. While $100 shares do not seem overly expensive today, $100 was a very hefty investment at that time. Here is a chart that shows the purchasing power of $100 at various times in the past if converted to today’s (November, 2017) dollars.

$100 in 1840 = about $2,700 in 2017
$100 in 1850 = about $3,010 in 2017
$100 in 1860 = about $2,820 in 2017
$100 in 1870 = about $1,800 in 2017
$100 in 1880 = about $2,170 in 2017
$100 in 1890 = about $2,490 in 2017
$100 in 1900 = about $2,660 in 2017
(rounded from Bureau of Labor Statistics measurement of U.S. inflation rate.)

There are disagreements over the many ways to estimate the value of a dollar through time and what the various results mean. Nonetheless, suffice it to say that average citizens were hard-pressed to invest in a single share of stock, let alone multiple shares. By limiting participation to only the wealthier slice of society, $50 and $100 par values often made it hard for startup companies to raise sufficient funds for development and equipment.

Enticing investors to pay for shares a little at a time

Certificates from the 1830s are not common, but the few that survive suggest that companies discovered early on that they could raise more money by offering shares for lower initial amounts and then assessing buyers for the remainder over time. Out of the need to entice sales, companies invented investing on a layaway plan. 

The initial par value of stock from the Baltimore & Ohio Railroad was $100. However, even as early as 1835, the company sold some of its shares for $50 and $75 and assessed buyers for the remainder after purchase. (See BAL-662a-S 25a and S-25b.)

Evidence of discounted sales from other companies can be inferred from rare (and seemingly under-priced) assessment requests and assessments receipts that survive. Here is an 1864 example of an assessment receipt from the Agricultural Branch Rail Road.

And here is an example of a stock certificate identical to one that the shareholder above would have owned. 

What if shareholders did not pay their assessments?

By the middle of the 1800s, many companies were selling shares for 10% down and assessing stockholders for the remainder, usually 10% per quarter. That does not mean all stockholders had the abilities or desires to pay when demanded. On the flip side, the refusal by stockholders to honor their commitments often created financial hardships for companies. Many companies responded to non-payments by modifying their corporate by-laws to force stockholders to forfeit their shares for failing to pay assessments.

(Note that the stock certificate above is silent about either assessments or potential pentalties.)

Did all shareholders know about or understand such penalties? Probably not. In fact, I currently know of only one railroad company that mentioned the penalty of forfeiture on its certificates. Here is an example of that text from the Mohawk Valley Rail Road Company (S-40, courtesy of Thomas O'Shaughnessy.)

Records are scarce, but we can surmise that losses of initial investments through non-payment of assessments would have come as shocking surprises to small investors.

Assessments for additional funds

In addition to ordinary assessments for partially-paid par values, an unknown percentage of companies also retained the right to assess stockholders for operating funds if needs arose. Such companies argued that stockholders were part owners of companies and therefore were responsible for contributing more money if companies fell onto hard times and economic trouble.

Records of lawsuits between stockholders and companies show that corporate by-laws generally prevailed when stockholders balked at onerous demands for money above and beyond par values. While often ignored by courts, shareholders often claimed that they should not be required to pay for the fiscal irresponsibility of operating officers. Charges of overly high presidential salaries are not a new phenomenon.

Did assessments help stock sales?

It seems obvious that stockholder lawsuits of any kind could not have been good for corporate stock sales. As early as 1866, railroad companies responded to objections over assessments by declaring their shares non-assessable. The earliest non-assessable stock certificate currently recorded in the database is S-50 from The Montgomery & Erie Railway Company.

With the perspective of 150 years, it seems logical that stockholder lawsuits over assessments probably dampened sales of assessable railroad stock. We have no clear proof among railroad certificates, but boisterous arguments among western precious metal mines about assessable stock certainly quickened the trend toward non-assessability in that industry.

When did assessable railroad stocks disappear?

Lacking access to all but a few corporate records, it is terribly difficult to determine a date when assessable railroad stocks disappeared from trading. I can find mentions of assessable western mining stocks being sold as late as 1916. Although he offered no proof, author Thomas Gibson specifically stated in 1919 (Simple Principles of Investment, p118 )that, “There is no such thing as an assessable railroad stock.” It is hard to prove a negative, but I have been unable to find any records of successful assessments on railroad stockholders after 1898. (Stuart Daggett, 1908, Railroad Reorganization.) Splitting the differences between those dates, I suggest it is reasonably safe to assume that most assessable railroad stocks were gone by 1910.

How can a collector know if a stock certificate was assessable or not? 

Generally, the determination is unclear. The most obvious evidence appears in the form of phrases found on collectible certificates attesting to non-assessability:
  • Full paid
  • Fully paid
  • Full paid and unassessable
  • Full paid and non-assessable
  • Fully paid and non-assessable
  • Fully paid up and non-assessable
  • Full paid shares non assessable
  • Full paid and non-liable
  • Full paid, not subject to assessment
  • Full paid and neither assessable or redeemable
  • Full paid and forever non-assessable
  • Fully paid and free from assessments
  • Fully paid and not liable for any further calls
  • Full paid and not subject to further calls or assessments
  • Not subject to any future calls or assessments
  • Paid up
  • Paid up and non-assessable
Currently, only about 14% of varieties of collectible railroad certificates can be positively identified as non-assessable. On the other hand, printed evidence of assessability is much scarcer and harder to find. Collectors will find sparse mention on stock certificates in text similar to:
  • assessable shares
  • subject to assessments
  • subject to all payments due
  • subject to assessments as provided in the By-laws of said corporation
  • subject to each assessment as may be legally made thereon
  • on which there is due and to be paid on call of the directors
It appears that companies often understated assessability by referring to provisions in company by-laws. It would seem that few investors would have known how to acquire company-bylaws and fewer still would have taken the time to do so. What appears to be possible references to assessability may be found in rather common and oblique language on certificates such as:
  • subject to the provisions of the Charter and the By-laws of the Company
  • subject to the Memorandum and Articles of Association thereof

Most evidence of assessability can be implied by certificates that sold initially for less than par value. That behavior was relatively common between about 1840 and 1880. Such shares often carried phrases similar to:

“…on which ______________ Dollars per share have been paid.”

Does assessability affect collector bids?

As a group, railroad stock certificates that clearly state assessability are much scarcer than those that display phrases similar to "Fully paid and non-assessable." Assessable stock certificates that mention forfeiture penalties are highly rare. However, I cannot find any evidence that collectors are willing to pay premiums for such rarity. At this point in time, the issue of assessability is barely a curiosity.

1 comment:

Greg Alexander said...

Fascinating read! I've often wondered about the par value of a certificate, but never really noticed the "fully paid" notation. I wonder how much assessability influenced market value of shares as they were traded on the NYSE and other stock exchanges.